Business

Tri-City stores feel effects of tax increases

Cigarette sales at Don Mariotto's convenience store in Kennewick are down about 10 percent since a $1 state excise tax increase took effect in May.

People are driving to Oregon or to tribal smoke shops to buy cheaper cigarettes and other tobacco products, said the owner of the 7-Eleven store, which holds the distinction of being the No. 1 Slurpee-seller in the world.

He said his costs have gone up on average by $1 on a case of beer because of another tax increase. The excise tax on beer increased by 50 cents per gallon-- from 26 to 76 cents -- on June 1. Since then, Washington retailers also have begun to tax sales of candy, gum and bottled water.

Mariotto said it was too early to judge the impact of the sales tax on candy and water. But kids don't have extra money, and an increase of 8.3 percent in price would mean they will tend to buy less, he said.

Convenience stores will be hardest hit by the new taxes, he said. He already had to laid off an employee to cut costs.

A new carbonated beverage tax of 2 cents per 12 ounces will be imposed July 1.

Sales of cigarettes, soda pop and candy often constitute the bulk of business at small stores, said Mark Johnson of the Washington Retail Association. They will feel the maximum pain, said the vice president of government affairs at the association.

The new state taxes, which also include an increased business and occupation tax on business services, are part of an effort to plug the state's $2.8 billion deficit. It affects lawyers, architects, engineers, physicians and private investigators, among others. The service tax increase, to 1.8 percent of gross income from 1.5 percent, affects all service businesses except hospitals, scientific research and development activities.

But taxes hurt sales and consumers, and in some cases potentially could lead to job losses, said Carl Gipson, director of Center for Small Business at Washington Policy Center in Seattle.

In a recessionary economy, businesses can only marginally afford to absorb the cost of tax increases. So, mostly they pass them on to consumers, Gipson said. That makes already overburdened consumers reluctant to spend, kicking off a cycle of slower sales and higher costs to businesses. They may decide to downsize more, which further slows economic revival, he said.

Many of the new taxes, except the one on candy and tobacco products, are supposed to expire in the middle of 2013, but there are no guarantees, Gipson said.

The new tax on candy is complicated, he said. A retailer has to know which candies are taxable. The state Department of Revenue has a list of more than 3,000 candies, he said. "Tax compliance costs are also going up."

Anytime prices go up, sales fall, said Rod Smith, who co-owns many convenience stores in Washington, including one in West Richland. He said the unusually cold, rainy weather has affected sales recently more than anything else.

He doesn't think the latest tax increases will hurt his business. "The local economy is strong," Smith said. Cigarette sales haven't take a dip, but Smith thinks beer sales could fall.

Though he doesn't agree with the state's taxation policy, some may find the increase the best way to deal with the deficit, Smith said.

In fiscal 2011, the sales tax on candy and gum will raise about $30.3 million and on bottled water about $32.6 million, said Mike Gowrylow, spokesman for the Department of Revenue.

The new excise tax on cigarettes and tobacco will raise an estimated $94.2 million; the increased excise tax on carbonated beverages will net $33.5 million and on beer about $59 million, he said.

Johnson of the retail association said he thinks the cigarette tax revenues will fall short of expectations. Consumers already have identified other sources for cigarettes, he said, adding that people are buying and selling cigarettes on Seattle streets to avoid the taxes.

The state has no idea how much the sale of contraband cigarettes might increase, but it expects a 17 percent drop in taxable consumption, Gowrylow said.

Johnson said association members are concerned they didn't have much lead time to learn about which candies are taxable. Those that contain flour generally are not taxable, he said. They want the state to be flexible and not slam them if they err in collecting sales tax on candies.

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